The partnership of small, family-ran shipowners and cash-laden, private equity players mirrors the classic tale of Prince Charming and Cinderella.

The Wall Street financial firms embraced lowly shipping companies, thinking they could catch the rebound in an industry with some of the largest boom-and-bust cycles.

But the marriage between these two vastly different worlds has already gone sour.

Too Many Ships Sink the Industry

Five years into the union, the bulk shipping industry, which includes vessels that carry iron ore, coal, and other dry commodities, is in the depths of a depression.

Rates for the most common of these type of vessels – a capesize – are currently around $4,300 per day. That is below the capesize’s daily operating cost of $6,500. When you add in financing and other costs, each vessel costs its owner about $13,000 per day!

Right now, operators of these ships are earning well less than half their costs on a typical journey. This is a huge contrast to 2008 – the shipping heyday 2008 – when vessels garnered $200,000 per day.

The Baltic Dry Index, which tracks the daily earnings of vessels hauling dry commodities, is down 95% from its 2008 peak and hit a three-decade low in February.

So, why are dry bulk shipping rates today so low?

Well, part of the problem is a slowing economy in many parts of the world.

However, the core issue is a massive oversupply of these types of vessels. You see, the Wall Street Prince Charmings are continuing to open their wallets and giving shipowners about $5 billion annually.

The shipowners, in turn, have been doing the only thing they know how to do, apparently… build ships. Since 2009, the size of the dry bulk shipping fleet has increased 5% or so every year on average. Yet the amount of commodities shipped rose by only 3% to 4% annually. It’s a simple recipe for continuing to losing money.

At least one prominent shipowner – Nikolas Tsakos, the CEO of Tsakos Energy Navigation (TNP) – has tried to talk some sense into the financers. Tsakos warned the deep-pocketed private equity firms to quit financing so many new ships, or they would risk “destroying” the market.

A Ray of Hope?

There are only two positives for the industry to cling to at the moment.

The first is that ship demolition rates are way up this year. Some smaller shipowners have thrown in the towel and decided to just scrap certain ships.

Clarkson Research Services reports that 4.6 million deadweight metric tons of Capesize ships have been sold for scrap so far in 2015. That’s up 368% from 2014’s level. The overall ship-breaking rate is up 37% this year.

But the real hope for the industry lies in consolidation.

This idea was brought to the fore by private equity pioneer in the bulk shipping industry, billionaire Wilbur Ross.

He acknowledged the “irrational exuberance” for the industry by private equity saying, “Shipping’s structural problems can only be solved by massive consolidation.”

In other words, fewer, larger firms controlling the fleet. You see, shipowners could idle some of their fleet to help bring prices back up. But the industry is very fragmented, and while all of the shipowners agree that idling vessels would be good, no one wants to idle their own vessels.

Ross is no martyr, though. He has spent about $2 billion backing the building of new ships through various investment vehicles.

Dim Investment Possibilities

Consolidation may be the answer to the bulk shipping industry’s woes, but whether the many, family-owned businesses will be willing to sell out to the likes of Ross is definitely up in the air. Many of these families, often Greek, have been in the shipping business for generations.

All I know for sure it that until some consolidation happens and new ship building slows drastically, this is an industry to be avoided.

After all, the current 25% overcapacity will not disappear on its own, and about 1,000 new vessels will be delivered this year alone.

Already this year, eight shipping companies have filed for bankruptcy. It’s likely others will follow, including some of the publicly traded companies.

And the chase continues,

Tim Maverick

Tim Maverick boasts decades of experience in the investment world. He spent 20 years at a major brokerage firm - as a trading supervisor and broker working directly with clients. Learn More >>

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